Whenever short sellers target a reasonably well-known company, the sensation is big.

The latest example in Germany is the real estate company Adler Real Estate, which the short seller Fraser Perring accused, among other things, of having artificially inflated its balance sheet.

It does not always turn out that a corresponding fire is blazing under the large clouds of smoke, nonetheless, corresponding allegations, for example at Wirecard, hit the mark.

At other companies, such as the leasing company Grenke, they brought about significant changes.

Martin Hock

Editor in business.

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The department for sustainable asset management at the Metzler bank recently tried to find a pattern in the confusing field of activist short-seller campaigns and examined the almost 100 cases that have occurred in Europe since 2010.

"Before 2010, the phenomenon was largely unknown on the continent," says Jan Rabe, responsible for ESG integration at Metzler AM.

"There is a certain logic behind it"

The aim of this study was to determine whether criteria can be found which type of companies are particularly susceptible to this type of campaign. After all, a sustainable investment should not only pursue ecological and social goals, but also focus on good corporate governance. And the damage to the portfolio has usually been pretty lasting. On average - according to the Metzler team - the market capitalization two years after the start of a campaign was only around half of the initial level, even though the bottoming began around 18 months after the reports were published.

An important finding was that it is less about the framework conditions of corporate management, but how they are lived. A high share of the state in the company, for example, which regularly leads to discounts in ESG assessments, or dubious remuneration hardly seem to play a role for investors - misconduct such as corruption or tax offenses do. In general, it depends very much what kind of allegations are. If sales were recommended primarily because of an overvaluation or product quality, this did not put a lasting strain on prices, the analysts write. Campaigns that dealt with inadequate reporting, non-transparent accounting or even fraud were generally far more effective - Wirecard is probably the most drastic example.

European companies from cyclical growth sectors, whose share prices were above average volatile and whose valuations were high, proved to be particularly vulnerable. “There is a certain logic behind it,” says Rabe. "If business models fail, the incentives for behavior outside the norm are greater." Such campaigns are particularly successful when the stocks in question are recommended for purchase by analysts on average, because then the discrepancy with market opinion is greatest. After the critical report by a short seller was published, these buy recommendations were usually successively revised downwards. Last but not least, short sellers like to target somewhat smaller companies.On the day before the campaign, 90 percent of the companies had a market capitalization of less than twenty billion euros, 60 percent of less than five billion euros. But the companies couldn't be too small either. Short sellers often use option strategies, but often there is no such market for small businesses. In this respect, a market capitalization of one to around eleven billion euros is particularly attractive for short sale campaigns.

The Metzler analysts applied the analysis to the investment universe of the MSCI All Country Europe IMI index with 1611 stocks.

71 stocks were found that met these criteria, including management that gave cause for caution.

Applied to the past, the documented cases of successful short sale campaigns could have been avoided, says von Metzler.